MANILA ELECTRIC CO. v.

PROVINCE OF LAGUNA Digest

DOCTRINE:
 While the Court has, not too infrequently, referred to tax exemptions contained in special
franchises as being in the nature of contracts and a part of the inducement for carrying on
the franchise, these exemptions, nevertheless, are far from being strictly contractual in
nature.

 Contractual tax exemptions, in the real sense of the term and where the non-impairment
clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority
in contracts, such as those contained in government bonds or debentures, lawfully entered
into by them under enabling laws in which the government, acting in its private capacity,
sheds its cloak of authority and waives its governmental immunity. Truly, tax exemptions of
this kind may not be revoked without impairing the obligations of contracts. These
contractual tax exemptions, however, are not to be confused with tax exemptions granted
under franchises.

 A franchise partakes the nature of a grant which is beyond the purview of the non-
impairment clause of the Constitution. Indeed, Article XII, Section 11, of the 1987
Constitution, like its precursor provisions in the 1935 and the 1973 Constitutions, is explicit
that no franchise for the operation of a public utility shall be granted except under the
condition that such privilege shall be subject to amendment, alteration or repeal by
Congress as and when the common good so requires.

FACTS:
 On various dates, certain municipalities of the Province of Laguna issued resolutions through their
respective municipal councils granting franchise in favor of petitioner, MERALCO for the supply of
electric light, heat and power within their concerned areas.

 On September 12, 1991, RA 7160, otherwise known as the Local Government Code (LCG) was
enacted enjoining LGUs to create their own sources of revenue and to levy taxes, fees and charges,
subject to the limitations expressed therein, consistent with the basic policy of local autonomy.

 Pursuant to the provisions of the Code, respondent province enacted Laguna Provincial Ordinance
No. 01-92, providing in part, as follows:

"SECTION 2.09. Franchise Tax. — There is hereby imposed a tax on businesses enjoying a franchise, at a
rate of fifty percent (50%) of one percent (1%) of the gross annual receipts, which shall include both cash
sales and sales on account realized during the preceding calendar year within this province, including the
territorial limits on any city located in the province."

 On the basis of the said ordinance, respondent Provincial Treasurer sent a demand letter to
MERALCO for the corresponding tax payment.

o Petitioner MERALCO paid the tax, which then amounted to P19,520,628.42, under protest.

 A formal claim for refund was thereafter sent by MERALCO to the Provincial Treasurer of Laguna
claiming that the franchise tax it had paid and continued to pay to the National Government
pursuant to P.D. 551 already included the franchise tax imposed by the Provincial Tax Ordinance.

 MERALCO contended that the imposition of a franchise tax under Section 2.09 of Laguna
Provincial Ordinance No. 01-92, insofar as it concerned MERALCO, contravened the provisions of
Section 1 of P.D. 551 which read:

"Any provision of law or local ordinance to the contrary notwithstanding, the franchise tax payable by all grantees
of franchises to generate, distribute and sell electric current for light, heat and power shall be two per cent (2%)
 of their gross receipts received from the sale of electric current and from transactions incident to the generation,
distribution and sale of electric current.

"Such franchise tax shall be payable to the Commissioner of Internal Revenue or his duly authorized
representative on or before the twentieth day of the month following the end of each calendar quarter or month,
as may be provided in the respective franchise or pertinent municipal regulation and shall, any provision of the
Local Tax Code or any other law to the contrary notwithstanding, be in lieu of all taxes and assessments
of whatever nature imposed by any national or local authority on earnings, receipts, income and privilege
of generation, distribution and sale of electric current."

 On August 28, 1995, the claim for refund of petitioner was denied in a letter signed by Governor
Jose D. Lina. In denying the claim, respondents relied on a more recent law, i.e., Republic Act No.
7160 or the Local Government Code of 1991, than the old decree invoked by petitioner.

 On February 16, 1996, petitioner MERALCO filed with the RTC of Sta. Cruz, Laguna, a complaint
for refund, with a prayer for the issuance of a writ of preliminary injunction and/or temporary
restraining order, against the Province of Laguna and also Benito R. Balazo in his capacity as the
Provincial Treasurer of Laguna. Aside from the amount of P19,520,628.42 for which petitioner
MERALCO had priorly made a formal request for refund, petitioner thereafter likewise made
additional payments under protest on various dates totaling P27,669,566.91.

RTC Ruling: DISMISSED the complaint and declared Laguna Provincial Tax Ordinance No. 01-92 as
VALID, binding, reasonable and enforceable.

ISSUE: W/N the imposition of a franchise tax under Section 2.09 of Laguna Provincial Ordinance No. 01-
92, insofar as petitioner is concerned, is violative of the non-impairment clause of the Constitution and
Section 1 of Presidential Decree No. 551? – NO.

HELD: WHEREFORE, the instant petition is hereby DISMISSED. No costs.

RATIO:
 Local governments do not have the inherent power to tax except to the extent that such power
might be delegated to them either by the basic law or by statute. Presently, under Article X of the
1987 Constitution, a general delegation of that power has been given in favor of local government
units. Thus:

"SECTION 3. The Congress shall enact a local government code which shall provide for a more responsive
and accountable local government structure instituted through a system of decentralization with effective
mechanisms of recall, initiative, and referendum, allocate among the different local government units their powers,
responsibilities, and resources, and provide for the qualifications, election, appointment and removal, term,
salaries, powers and functions, and duties of local officials, and all other matters relating to the organization and
operation of the local units.

"xxx xxx xxx

"SECTION 5. Each local government unit shall have the power to create its own sources of revenues and
to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to
the local governments."

 Where there is neither a grant nor a prohibition by statute, the tax power must be deemed to
exist although Congress may provide statutory limitations and guidelines. The basic
rationale for the current rule is to safeguard the viability and self-sufficiency of local
government units by directly granting them general and broad tax powers.

 Nevertheless, the fundamental law did not intend the delegation to be absolute and unconditional;
the constitutional objective obviously is to ensure that, while the local government units are
being strengthened and made more autonomous, the legislature must still see to it that:
a.) the taxpayer will not be over-burdened or saddled with multiple and unreasonable
impositions;
 b.) each local government unit will have its fair share of available resources;
c.) the resources of the national government will not be unduly disturbed; and
d.) local taxation will be fair, uniform, and just.

 The Local Government Code of 1991 has incorporated and adopted, by and large, the provisions
of the now repealed Local Tax Code, promulgated into law by Presidential Decree No. 231,
pursuant to the then provisions of Section 2, Article XI, of the 1973 Constitution.The 1991 Code
explicitly authorizes provincial governments, notwithstanding "any exemption granted by any law
or other special law, . . . (to) impose a tax on businesses enjoying a franchise.

 Indicative of the legislative intent to carry out the Constitutional mandate of vesting broad tax
powers to local government units, the Local Government Code has effectively withdrawn, under
Section 193 thereof, tax exemptions or incentives theretofore enjoyed by certain entities. This law
states:

"SECTION 193. Withdrawal of Tax Exemption Privileges. — Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical,
including government-owned or controlled corporations, except local water districts, cooperatives duly registered
under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn
upon the effectivity of this Code.”

The Code, in addition, contains a general repealing clause in its Section 534; thus:

"SECTION 534. Repealing Clause. — (f) All general and special laws, acts, city charters, decrees, executive
orders, proclamations and administrative regulations, or part or parts thereof which are inconsistent with any of
the provisions of this Code are hereby repealed or modified accordingly.”

 In the recent case of the City Government of San Pablo, etc., et al. vs. Hon. Bienvenido V. Reyes,
et al., the Court has held that the phrase in lieu of all taxes "have to give way to the peremptory
language of the Local Government Code specifically providing for the withdrawal of such
exemptions, privileges," and that "upon the effectivity of the Local Government Code all
exemptions except only as provided therein can no longer be invoked by MERALCO to
disclaim liability for the local tax." In fine, the Court has viewed its previous rulings as laying
stress more on the legislative intent of the amendatory law — whether the tax exemption
privilege is to be withdrawn or not — rather than on whether the law can withdraw, without
violating the Constitution, the tax exemption or not.

 While the Court has, not too infrequently, referred to tax exemptions contained in special
franchises as being in the nature of contracts and a part of the inducement for carrying on the
franchise, these exemptions, nevertheless, are far from being strictly contractual in nature.

 Contractual tax exemptions, in the real sense of the term and where the non-impairment clause
of the Constitution can rightly be invoked, are those agreed to by the taxing authority in
contracts, such as those contained in government bonds or debentures, lawfully entered
into by them under enabling laws in which the government, acting in its private capacity,
sheds its cloak of authority and waives its governmental immunity. Truly, tax exemptions of
this kind may not be revoked without impairing the obligations of contracts. These contractual
tax exemptions, however, are not to be confused with tax exemptions granted under
franchises.

 A franchise partakes the nature of a grant which is beyond the purview of the non-
impairment clause of the Constitution. Indeed, Article XII, Section 11, of the 1987
Constitution, like its precursor provisions in the 1935 and the 1973 Constitutions, is explicit that
no franchise for the operation of a public utility shall be granted except under the condition
that such privilege shall be subject to amendment, alteration or repeal by Congress as and
when the common good so requires.